FDIC Setting Up Committee on Community Banking

The Federal Deposit Insurance Corp.’s board of directors voted last week to create the FDIC Advisory Committee on Community Banking. Calling community banks the “lifeblood of our nation’s financial system,” FDIC chairman Sheila Bair said the committee “will get direct and frequent input on many issues from a cross-section of community bankers nationwide.”

R. Michael Menzies, chairman of the Independent Community Bankers of America and president and chief executive officer of Easton Bank praised the creation of the committee. In public statement on May 29 he said the group will offer advice on issues such as the “latest examination policies and procedures, deposit insurance assessments and regulatory compliance matters.” Insurance coverage and credit and lending practices will also be on the agenda.

Another topic on the table may well be consolidation, as the FDIC and the industry continue to face the highest level of bank failures in decades, although that prospect was not addressed by either party. “Across the U.S. right now there are still a fair number of community and regional banks with significant problems,” says Gerald Blanchard, a partner in Bryan Cave’s Atlanta office and a member of the law firm’s financial institutions team.

He expects failures to continue at an elevated rate through this year, probably tapering off through 2010. “There are banks in the sunbelt and other areas sitting on developed lots—lots that have been bulldozed, wired, and paved but not built on—worth 15 to 20 cents on the dollar,” Blanchard adds. “Those institutions with heavy investments are suffering big losses and big hits to capital. So yes, we will continue to see failures.”

The model that newer banks have followed, to lend to builders and depend on brokered accounts, has “broken down,” says Blanchard, and “investors are staying away from them. We’re going back to traditional banking, creating and maintaining deposits, focus more on long-term value instead of revenue.” The attorney expects a “massive consolidation of troubled but not about to fail institutions” in the next two to three years. “The FDIC may not have come out explicitly in favor of the shift, but it’s encouraging it.”

It’s too soon to say how far the shaking out will go, although “one thousand banks could disappear through mergers and acquisitions," Blanchard says. Private equity investors are starting to test the waters again. “They jumped in with WaMu and were bitten by sharks. With BankUnited, PE investors knew they were going into a deal with a government backstop. Now other investors will step in more actively.”